Don’t Be Fooled
Monday, 17 February 2020
By Bernd Struben
- No end in sight
- Using Charts to Manage Risk
There was a time when I had a pretty good handle on global economics. On how the world’s fiscal and monetary systems worked. Or so I believed.
I didn’t come by that belief easily…or cheaply. I earned it over five years at the University of Michigan followed by a year of post graduate work at the University of Connecticut.
By the time I left academia for the real world in 1992, at the wizened age of 23, my head was full of presumed facts.
I could, for example, have told you with certainty that zero bound interest rates and rampant money printing would quickly usher in inflation. That no government on Earth could get away with that for more than a year…let alone a decade.
Alas, I’m not the first to have the hubris of youth dashed by reality.
Much of what I was taught works well in textbook models but not so well when unpredictable humans run the show.
So, 12 years into the post GFC rescue operation, we find ourselves with a record low cash rate of 0.75% in Australia. A US Fed funds rate of 1.5–1.75%. And negative rates still prevailing in Japan and the EU.
And we find ourselves in a world that’s created trillions of dollars out of thin air to stay one halting step ahead of the next recession.
Images of Germans lugging suitcases full of near worthless notes in the 1923 Weimar Republic come to mind. Or, more recently, Zimbabweans pushing wheelbarrow loads of their own hyperinflationary currency in 2007. Just hoping it may be enough for a loaf of bread.
Yet inflation in the developed world, as we’re often reminded, remains ‘stubbornly’ elusive.
Thus our enlightened central bankers take courage and keep the pedal to the metal.
More, after the markets.
Over the weekend, the Dow Jones Industrial Average closed down 25.23 points, or 0.09%.
The S&P 500 closed up 6.22 points, or 0.18%.
In Europe the Euro Stoxx 50 index closed down 5.77 points, or 0.15%. Meanwhile, the FTSE 100 lost 0.58%, and Germany’s DAX closed down 1.22 points, or 0.01%.
In Asian markets Japan’s Nikkei 225 is down 190.13 points, or 0.80%. China’s CSI 300 is up 1.22%.
The S&P/ASX 200 is down 10.51 points, or 0.15%.
West Texas Intermediate crude oil is US$52.17 per barrel. Brent crude is US$57.27 per barrel.
Turning to gold, the yellow metal is trading for US$1,583.19 (AU$2,353.14) per troy ounce. Silver is US$17.74 (AU$26.37) per troy ounce.
And bitcoin’s fallen back below the US$10k mark. One bitcoin is worth US$9,967.65.
The Aussie dollar is worth 67.28 US cents.
No end in sight
Returning to the case of the missing inflation…
The world’s leading central banks are gearing up plans for fresh rounds of QE should the coronavirus take a significant bite out of economic growth…as it almost certainly will.
Even if, God willing, the virus quickly runs its course and fades away, there’s no end in sight to central bank meddling. And no end in sight to rock bottom interest rates.
At least not according to the boffins running the show.
You may have caught the latest from RBA Governor Philip Lowe. He spoke at the Australia–Canada economic leadership summit in Melbourne last Thursday.
‘It’s quite likely we’re going to be in this world of low interest rates for years, perhaps decades, because it’s driven by structural factors in the global economy…
‘We’ve made choices which give us structurally high housing prices and structurally high levels of debt relative to our income. That’s what we’ve done and it’s created a vulnerability because we’ve got a lot of debt on our balance sheets relative to income.’
Erm. Hold on a tick Phil.
You’ve made choices that have given us ‘structurally high’ — or perhaps more accurately ‘insanely high’ — house prices. Those same choices have encouraged Australians to take on mountains of debt and thus ‘created a vulnerability’.
Vulnerabilities, like, the 22.5% leap in the average mortgage in New South Wales over the past 12 months. That’s according to the ABS, which reported a jump from $500,000 to $612,000.
Yet Lowe envisions these same policies will endure for decades?
And he’s not alone.
Over in the US, Fed Chairman Jay Powell is reading from the same crib sheet.
Speaking to the Senate Banking Committee last Wednesday, Powell said, ‘Low rates are not really a choice anymore, they are a fact of reality.’
These same low rates saw the yield on the Greek government’s 10-year bonds fall below 1.0% last Wednesday. This is Greece we’re talking about. Only a few years ago, when it looked like Greece may default on its EU debts, the 10-year bond was returning 20% to investors willing to take on the risk.
Now, faced with negative rates, European investors are desperate for any kind of return on their money.
Do the policies that created this situation really sound like they can persist for decades more?
While the past years have showed us anything is possible, that seems a tad naïve.
At some point there’s going to be so much cheap money sloshing around the system that the housing and stock markets can no longer absorb it all.
When that happens, prices throughout core areas of the economy — food, clothing, labour — will go up.
When people realise the value of their native currency has been undercut for years, the process could spiral quickly. And that stubbornly missing inflation is likely to suddenly be very much in attendance.
Australia shouldn’t see anything as dramatic as 100% annual inflation. But a return to 10%…or even 5%…will mandate a backflip on interest rates.
That may come as long overdue, welcome news to cashed up savers. But the majority of Aussies — many carrying record mortgages — could be pushed over the edge.
Not the brightest picture to start your work week, I know.
But when central bankers across the globe give coordinated messages on cheap, easy money for decades to come, you should sit up. Take notice. And put their words through your most stringent bull s**t detector.
Mine happens to be flashing red.
(Ed note: Rising interest rates in a debt addled world are one of the triggers Vern Gowdie sees unleashing the next global meltdown. But his concerns run far wider. Find out why…and what he recommends you do to protect your wealth today…here.)
Video update…risky business
Below veteran stock trader Murray Dawes share’s his latest trading tips and insights.
In his premium advisory service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to hunt down rapid fire profits from stocks while minimising risk.
Today, Murray puts the focus on how you can minimise the risk in your own trading.
Scroll down and click on the image below to watch Murray’s latest video now.
For more about the edge Murray offers active traders over at Alpha Wave Trader click here.
Using Charts to Manage Risk
[Click on the picture to learn how to use mean reversion to get into powerful trading positions.]
Technical analysis has a pretty bad reputation in the mainstream media.
I’m the first to admit there are plenty of charlatans out there who read a few books and then call themselves technical analysts.
I personally don’t have a lot of time for classical technical analysis. I don’t look for pennants or double head and shoulders. I don’t use trendlines because price action is non-linear.
There are plenty of rabbit holes that you can go down searching for the best way to use technical analysis so many people just toss it all in the bin and call it hocus pocus.
The way I see it, technical analysis is simply a risk management tool.
You aren’t trying to predict the future by reading charts. It’s not tea leaves in the bottom of a cup.
What I do when I analyse charts is look for opportunities where I think some form of mean reversion has a good chance of occurring.
Prices are often revisiting old ground to shake out any weak hands.
If you expect prices to constantly mean revert you can use that knowledge to get yourself into powerful trading positions.
I am always looking for ways to hit my initial target as quickly as possible. Because once I have taken part-profit the future outcomes for the trade are either breaking even or making money.
Once the initial capital is safe you can watch the price action without having a heart attack every time the price drops.
The other thing that is achieved once part-profit is taken is that the breakeven stop-loss is usually below an important technical support level.
That means prices will have to break that strong support level to get you out.
If you do get stopped out of the trade you are happy to be out because prices could fall a long way once the strong support level has given way.
There is nothing worse than being stopped out of a trade within the current range and then watching the stock fly without you on it. You want to be forced out of the trade at a point where you are happy to get out.
Technical analysis is extremely useful for risk management. But as I keep saying, it’s a windsock and not a crystal ball.
Editor, Alpha Wave Trader